The Collapse of Carillion – One Year On

One year on from the demise of Carillion, Stewart Smyth analyses the root causes, the winners and the losers of liquidation, and the impact on communities of the collapse of a company heavily plied with government funding.

Twelve months ago on 15th January, construction and facilities management firm Carillion collapsed. The company with business interests in Britain, Ireland and Canada employed over 40,000 people and was part of the 250 highest value firms on the London Stock Exchange, with an annual income in excess of £5 billion.

Carillion emerged from the Tarmac group in the late 1990s and pursued a strategy of substantial growth through acquiring other firms and aggressive business (especially accounting) practices.

The past year has seen investigations by politicians, regulators and the media into Carillion’s collapse, in part because of the size of the company but also because a significant proportion of its business came from government contracts including Public Private Partnership (PPP) projects.

When corporate failures like Carillion occur, there are terrible social impacts (such as the delayed school and hospital construction) and some light is shed on actual existing capitalism including the manner in which big firms are being run.

Liquidations – winners and losers

Carillion’s liquidation is a reminder that businesses going bust is an integral part of capitalism. In any liquidation there is a fight over the remaining assets (value) that the business controls. Capitalism has developed laws for the relatively smooth division of the value among the capitalists but there are often legal cases where one business seeks to minimise their losses or even take advantage of assets being transferred/sold at fire-sale prices.

So the losses made by the liquidated company are spread around on the basis of who has the least power and legal resources. This is why when Carillion collapsed, among those first impacted were small and medium-sized firms who carried out sub-contracted work. For example, Kildare-based Sammon Group entered examinership in April, 2018 due to a debt of €8 million from Carillion. 1

There are other losers in a liquidation; in Carillion’s case nearly 3,000 workers lost their jobs, many more were transferred to other companies, at times without any protection of their existing pay and working conditions. There has been a huge impact on communities in Carlow, Meath, Wexford, Wicklow, Liverpool and Birmingham (among others) where school or hospital construction has either been delayed or postponed with an uncertain completion date.2 In the cases of the hospitals in Liverpool and Birmingham these projects have been bailed out from public funds and taken over directly by the relevant NHS Trusts.

The winners from the liquidation process include the existing big firms that take on profitable projects. For example, in April the railway maintenance company Amey 3 “snapped-up” profit making maintenance contracts in three English regions but left the loss-making contracts to be administered through the liquidation.

Big Four Winners

One other group of winners that has been firmly in crosshairs of the politicians’ investigations are the Big Four accounting firms. The four largest accounting firms – KPMG, EY, PwC and Deloitte – have exploited their position in global capitalism to extract fees through a variety of sources from big corporates and governments; and once the music stops they simply rotate their clients as if they had caused no harm.

Over the past few decades the Big Four have been involved with illegal tax avoidance schemes, negligence in auditing practices, ignoring corruption and bribery in their clients and own practices, to such an extent that Prem Sikka and Austin Mitchell have labelled them as the Pinstripe Mafia. 4

In the case of Carillion, a House of Commons select committee found that:

Deloitte was paid over £10 million to act as its internal auditor but were either “unable or unwilling” to identify the “terminal failings” in Carillion’s risk management and financial controls, or “too readily ignored them”.

Ernst & Young was paid £10.8 million for “six months of failed turnaround advice”. 5

None of the above is new or unique to the collapse of Carillion, as it joins the long list of corporate failures and scandals, such as Enron, Parmalat, Guinness, Mirror Group pensioners, that are an ever present part of the history of capitalism.

The financialised firm

What is of a newer vintage and gives us an insight into the manner in which capitalism is currently operating in developed economies, is to consider the why Carillion collapsed? Here the concept of financialisation comes to the fore.

Financialisation as a term has become popular since the global finance crisis of 2008 as way to try to capture the increased power of finance capital through the finance system, use of finance-based techniques, logics and discourse. So the US sub-prime mortgage market that sparked the crisis a decade ago, used new financial products such as collateralised debt obligations (CDOs) to extend mortgages into new areas.

Finance-based techniques, logics and discourse have not just infiltrated the mortgage and housing systems but are spreading throughout the operations of capitalism; including, for example, the use of financial language in public policy, the operation of residential care sector or the water industry, and private sector corporations.

One of the key characteristics of financialisation is an emphasis on short-termism as a way to maximise the wealth of shareholders and by extension senior directors. This drives corporations to seek profits from any possible source. In Marx and Engels time they noted:

The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere.

Today the development and dispersion of financial techniques and the credit system allows companies like Carillion to take profits from the future and distribute them today.

In simple terms, changes in accounting rules mean that Carillion can book profits in the current year, on projects that may take three, four or more years to complete. These accounting calculations used to be based on conservative rules, informed by previous experience. Today the obsession with market values means that the accounting calculations are based on expected future cash flows, using a finance technique known as net present value (among other techniques).

By bringing forward these profits Carillion was able to pay large dividends to shareholders. The market values also allowed the firm to borrow more cash to pay for the dividends. Adam Leaver, from Sheffield University, calculated that in the five-year period between 2012-2016 Carillion made a total profit of £669 million and paid out £371 million to shareholders. 6

But here is the kicker, Carillion only generated £166.4 million in cash from its normal operating activities; meaning they distributed to shareholders more than twice the amount of cash they made. This is one of the ways that financialisation hollows out corporations.

What can be done

Carillion’s collapse has been accompanied by a range of calls for greater oversight, including a total revamp of the audit and regulation systems. While there is a need for effective, democratic and transparent regulation of any market-based system, it is naive to think that such changes will stop future corporate collapses.

Greater regulation is premised on the basis that the problem with corporate failures lies with a group of greedy individuals, the board of directors. For example, Frank Field, Chair of the House of Commons Work and Pensions Committee, said of Carillion:

‘Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners.’ 7

Not only have we heard all this before after every corporate failure, but it ignores a key point in understanding capitalism – capital abhors any barrier to making profits. As soon as one loophole is closed the armies of accountants, lawyers and management consultants will find ways of creating others – just look at the history of the tax avoidance schemes that the Big Four keep generating.

So the attitude of socialist to reforming corporate regulation should be twofold. Incremental changes, such as turning auditing and accounting rule-setting activities into public goods, on a not for profit basis, are necessary steps. But we have no illusion that this will be enough to stop future corporate failures because the problem has deeper roots than just the greed of directors; it is in the very nature of capitalism.

We need not just regulatory regime change but fundamental system change.